Congress could help states collect online sales taxes

SPRINGFIELD, Ill. — Illinoisans who buy the latest best-selling book as a Christmas gift on Amazon.com will pay $12.99. Buy the same book at a local bookstore and they’ll pay an extra 81 cents.

The bookstore isn’t charging more. It’s collecting Illinois’ 6.25 percent sales tax, which online retailers without a physical presence in the state don’t have to collect.

This tax loophole is costing the cash-strapped state $170 million every year, according to an estimate from the Illinois Department of Revenue.

A 1992 U.S. Supreme Court ruling said only sellers with a physical presence, such as a warehouse, in a state must collect sales tax. That same ruling also said Congress has the power to change this.

Several plans are moving through Congress to allow states to force online and catalog retailers to collect sales tax on intrastate sales.

In Illinois, residents are required to pay sales tax on all online purchases, even if a retailer doesn’t collect it. In an attempt to collect some of the missing sales tax, Illinois now has a line on its income tax form where people can self-report and pay what they owe.

However, very few consumers follow, or are even aware, of this law, according to the state Department of Revenue.

Brick-and-mortar shops in the state say online retailers use this to their advantage.

“Our local retailers are severely hampered by the competitive advantage that retailers who don’t have a physical presence here in Illinois have over those paying property taxes, who hire people in our community, who are supporting the local little league,” David Vite, president of Illinois Retail Merchants Association, a lobbying group for retail stores in the state, said during a Dec. 1 conference call on the issue.

Zach Hoffman said he faces this situation on a regular basis as co-owner of Wiley Office Furniture in Springfield, Ill.

“I’m a fairly conservative person and a not a big fan of higher taxes. However, I am a supporter of equitably applied taxes,” Hoffman said. “If the expectation is that vendors are to be the collection agents of that sales tax, then all vendors should have that requirement. It’s both inequitable and economically inefficient for two virtually identical vendors, one a brick-and-mortar and one an online, to have two, radically different tax treatments.”

A bipartisan plan in the U.S. Senate would allow states to collect sales taxes from online businesses from out of state. A state wanting to collect sales taxes from out-of-state businesses would have to provide software to retailers to assist in the collection, under the legislation. States couldn’t require sellers to collect other local taxes, or pay registration, licensing and regulatory fees.

“Most small businesses in Illinois don’t want a government handout. They don’t want special treatment. They just want to be able to compete fairly,” U.S. Sen. Dick Durbin, D-Ill., who is co-sponsoring the legislation, said in a written statement.

Beyond giving online retailers an advantage, proponents of the proposal say it would be a boon to states’ checkbooks.

This spring, Illinois joined the ranks of California, New York, Texas, Tennessee and other states that require any business with a physical presence in the state to collect sales tax on purchases.

That led at least two businesses to leave Illinois, after Seattle-based Amazon.com Inc. threatened to cut ties with them. Amazon and lawmakers reasoned that if the partnerships continued, the state could force Amazon to collect sales tax on all sales.

Had a national law been in place, those businesses wouldn’t have left the state, proponents of a national solution say.

Amazon, once the loudest voice of opposition to closing the sales tax loophole, has given its support to Durbin’s legislation.

“States’ rights should be protected. States need the freedom to make their own revenue policy choices,” Paul Misener, Amazon’s vice president for global public policy, said at a congressional hearing Nov. 30. “For example, Texas has chosen to eschew personal income tax, and that decision makes the Texas budget particularly sensitive to uncollected sales tax. The right of Texas to make this policy choice effective should be protected.”